United States v. Cleveland

decided: April 16, 1973.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,v.ROBERT E. CLEVELAND, DEFENDANT-APPELLANT

Fairchild, Cummings and Stevens, Circuit Judges.

Author: Stevens

STEVENS, Circuit Judge.

Defendant was indicted and convicted on three counts of tax evasion in violation of 26 U.S.C. § 7201. On appeal, he raises numerous issues relating to the sufficiency of the evidence, several evidentiary rulings, the voir dire, the instruction of the jury, and the application of the Jencks Act, 18 U.S.C. § 3500. Only the final point has merit.

The prosecution was based on the "net worth" theory of proof. This theory assumes that a taxpayer's increase (or decrease) in net worth plus his nondeductible expenses (less nontaxable receipts, if any) during the tax year should equal his taxable income. If there is a substantial unexplained discrepancy between this figure and the amount actually reported, the inference that taxable income was not reported is sufficient to support a conviction. See Capone v. United States, 51 F.2d 609 (7th Cir. 1931); Guzik v. United States, 54 F.2d 618 (7th Cir. 1931). Although the theory puts the burden of explaining the discrepancy on the defendant, and has other deficiencies, the Supreme Court has approved its use. United States v. Johnson, 319 U.S. 503, 87 L. Ed. 1546, 63 S. Ct. 1233; Holland v. United States, 348 U.S. 121, 99 L. Ed. 150, 75 S. Ct. 127.

"While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such that it cannot be met merely by the application of general rules. Cf. Universal Camera Corp. v. Labor Board, 340 U.S. 474, 489, 95 L. Ed. 456, 71 S. Ct. 456. Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute . . . . Appellate courts should review the cases, bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." 348 U.S. at 129.

With this admonition in mind, we turn to the case at hand.

I. Sufficiency of the Evidence

The government's calculations indicate that defendant failed to report $6,064.76 in 1964; $6,744.92 in 1965; and $5,864.35 in 1966, the three indictment years. By way of contrast, he reported no income in 1964; $102.10 in 1965; and $1,591.04 in 1966. Cleveland argues that close examination of the government's case reveals that the proven discrepancies were only $909.00 in 1964; no taxable income in 1965 (although he reported $102.10); and $2,839.00 in 1966. The proven discrepancies in 1964 and 1966, he argues, are not substantial enough to support a conviction.

1964

Cleveland claims the government made four errors in its schedules for 1964. First, the government included as an increase in net worth $5,000 received in settlement of a lawsuit, but did not enter the same amount as a liability to his client. There was evidence at trial, however, which showed that Cleveland felt no obligation to pass the money on to his client and in fact had used it for his own purposes. Nor had any attempt to collect it ever been made. Tr. 150. This evidence was sufficient to establish that the $5,000 was income. Rutkin v. United States, 343 U.S. 130, 136-137, 96 L. Ed. 833, 72 S. Ct. 571 (1954); United States v. Wyss, 239 F.2d 658 (7th Cir. 1957).

Second, defendant contends he should have been credited $800 on the purchase price of a building (the Foster Avenue building). The closing statement shows a credit of $800 for "6 stoves and 2 refrigerators." Gov. Ex. 41C, App. 78-79. Defendant's expert witness testified that this represented "a reduction in purchase price."*fn1 Even though we must view the evidence most favorably to the government, for purposes of decision we accept this testimony. Nevertheless, the $800 is immaterial in light of the other evidence of guilt.

Third, Cleveland contends that he overstated on his 1964 tax return the interest expense on the Foster Avenue property, thereby creating the impression of additional resources available to defendant during the tax year. The government, however, did not rely on the tax return in its computations. It relied instead on the Liberty Savings and Loan Mortgage payment ledger cards. Gov. Ex. 41. Defendant stipulated to the interest figures contained therin. Gov. Ex. ZZZ.

Fourth, the government did not credit defendant for $636 in insurance commissions received by him on his own life insurance policy. Defendant's own expert witness recognized that the amount was income. Tr. 341-342. Cleveland ...

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